The experience of low-cost shopping has become a hassle. More and more, it seems that you can't find what you want, things aren't where an employee tells you they are, and even the employee trying to help you can't find what you're looking for, although he's sure it's in the store somewhere. If you make it to the checkout line with what you came there to buy, you might have a long wait and you might find out the price is different from what it says on the tag.

These things happen so frequently that we customers think bad service is the price we have to pay for the low price of the goods or services. But, as U.S. manufacturers have learned, it is not the “true” price—it is more like a tax on low prices that are achieved by keeping labor costs to a minimum. That is, it's a tax on trying to manage a complex operating environment with employees who are not sufficiently trained, not sufficiently motivated, or just too few in number. Like all taxes, it is a choice, not a necessity. And while a tax is sometimes a useful choice, this choice by retailers is not.

In any service company, customer satisfaction and financial performance depend on two factors: managing operations and managing customer interactions. In some service environments, managing operations is actually a lot more important than managing customer interactions. Many companies miss this point. So do customers. When a restaurant's kitchen operations are sloppy, it's the server who gets blamed for the long wait or the wrong dish or the one person who's still waiting while all the others are halfway through their meals.

One retailer I worked with had a system for scoring a store manager's performance. Twenty percent of the score had to do with the store's customer interactions. “Mystery shoppers”—undercover evaluators hired by retailers—would come into the store, acting as ordinary shoppers, and score it for how the employees greeted customers, made eye contact, and answered questions.

But those factors, important as they may seem, had no effect on the store's profits. What mattered for profits was operations—measures such as how well the shelves were organized and labeled, the percentage of items that were supposed to be on display but stayed in the back room, and the percentage of poorly selling or obsolete goods that were supposed to be returned to the distribution center but remained in the stores.

Those measures were given only about a 10 percent weight in a store manager's score. In short, this retailer wasn't paying enough attention to what actually mattered for its own profits.

It's not that customers do not like to be smiled at or treated nicely. But kindness or friendliness won't make up for operational incompetence. It is hard for a grocery store to make you happy if it repeatedly doesn't have what you came in for, or if the checkout line is often long and slow, or if you get home and find that the sell-by date on the eggs you just bought has already passed. It is hard for an airline to make you happy if it loses your bags. It is hard for your dry cleaner to make you happy if you can't wear your favorite suit to an important interview because it's still not ready for pickup.

In addition, if certain businesses—think of home-improvement warehouses—try to operate without operational discipline, they can become unsafe for employees and for customers. Consider some of the products that Home Depot carries: heavy objects such as tiles, roofing shingles, doors, lumber, and bags of cement. If there are no standards in how products will be received, shelved, or put into storage, accidents are likely. Indeed, by the 1990s, Home Depot was suffering a disturbing number of accidents, some of which resulted in employee deaths.

Building efficient operations isn't enough, though. Even the best-designed operating system does not guarantee good outcomes if that design is not carried out every day by competent, motivated employees.

Put another way, good service rests on a foundation of good operations. But good operations rest on a foundation of skilled and motivated employees.

The quality of employees is, of course, a matter of whom you hire, but even more so, it's a matter of how you invest in them. Looked at in reverse, if you decide to go cheap on labor, you're going to undermine service, not only directly but indirectly through operations. And the extent of that indirect degradation is often much greater and more damaging than many service companies realize.

A Tale of Two Auto Plants

Research on many different industries has consistently found that operational performance depends not just on operational design but on people. Stores or factories with pretty much the same system—the same procedures and rules—nevertheless perform very differently. At one retail chain I studied, all the stores had similar layouts and the same process design, used the same IT systems, and offered the same employee incentives. And yet the performance of the best store and the worst differed by a factor of forty-three. Stores that had higher employee turnover, less training, and more workload for employees performed worse.

When I taught operations management at Harvard Business School, I—like many others—held up Toyota as a best-practice example of a production system that delivered excellent quality. I always told my students how difficult it is to copy Toyota, but frequently a student who worked at some other auto manufacturer would object: “We have the exact same system at Acme Auto.” But there was a reason Acme didn't perform as well as Toyota.

The Toyota Production System is founded on standardization. As Steven Spear and Kent Bowen describe in a groundbreaking 1999 Harvard Business Review article, Toyota standardizes each task, communication, and process and even standardizes the process of process improvement. It uses a lot of tools to help workers on the assembly line do all this.

One of the tools for process improvement is the andon cord, a rope strung above the assembly line. Work is so standardized that workers know exactly what to expect each time they perform a task. If a worker sees any deviation from that expectation, he or she pulls the andon cord, whereupon music starts to play, alerting the team leader that there is a problem. Team leaders immediately come over to investigate the problem and try to solve it. They try to solve not just the immediate problem—whatever defect the worker spotted—but the problem that caused the problem: What caused that defect, and how did it get this far down the assembly line?

When you visit a Toyota factory, you see that workers and managers always adhere to the standards. The culture of discipline is immediately obvious. For me, it started with the little things the managers did as they showed our group of professors around. When we left the conference room, they erased the boards and put the chairs back where they belonged. The conference room looked as clean when we left as it had been when we walked in. When we toured the factory, the managers adhered to all the rules—staying within safety lines, wearing eye protection, and so on. As we strolled the factory floor, the andon music played so frequently that it almost felt like background music.

Acme Auto indeed had the same system, right down to the andon cord. In fact, when a different group of professors, including myself, met with Acme managers, they were holding a copy of the Toyota case study we taught in our classes and telling us they used the same system. But when we left the conference room, they didn't erase the board and put the chairs back. When we were walking around the factory, it was OK for them or for us to break the rules a little. We didn't stay inside the line designated for visitors.

And when I watched the workers, I saw that they, too, were breaking little rules. I watched one worker whose job included inspecting each car's left back-door frame and then putting the rubber trim between the frame and the window. Eventually, a car came down the line with a small dent right where he was supposed to put the rubber trim. But instead of pulling the andon cord, he hammered out the dent with a mallet, and off it went to the next station. That car was probably OK, but whatever problem had caused the dent was still in the system. We saw another worker encounter a problem with his welding equipment. He didn't pull the andon cord—he jumped up onto the equipment and did something to get it working again. It was impressive, even heroic, but clearly dangerous and only a short-term fix, not a real solution to the underlying problem.

It is no wonder, then, that this plant did not produce cars of Toyota's quality. Management had adopted the Toyota system on paper, but it had not invested enough—whether in salary or training or just attention to and insistence on discipline—to build a workforce that could execute the Toyota Production System minute by minute, day by day.

Great performance, whether in customer service or the quality of manufacturing, requires operational excellence. Operational excellence requires a great operational design and great people to carry it out. Neither can make up for the lack of the other.

The Conference Board Review is the quarterly magazine of The Conference Board, the world's preeminent business membership and research organization. Founded in 1976, TCB Review is a magazine of ideas and opinion that raises tough questions about leading-edge issues at the intersection of business and society.